Valuation

Question 1

What are the five valuation methods?

Answer 1

1. Comparable
2. Investment
3. Residual
4. Profits
5. Depreciated Replacement Cost

Question 2

What is the Hierarchy of evidence

Answer 2

(Berstein and Reynolds handbook: Not RICS endorsed)

1. Open market lettings
2. Lease renewals
3. Rent reviews

Question 3

When would you use the investment method?

Answer 3

When valuing an income stream

Establish market rent
Establish yield (= measure of return on investment)
Define what the property would produce

Yields are useful to compare asset classes. Higher yield is higher risk so reflects lower value

Question 4

What is the advantage of DCF? (investment valuation method)

Answer 4

It is growth EXplicit (implicit in a term and reversion valuation)

BUT seen as more of art than science, and it’s open to less scrutiny

Question 5

Why isn’t DRC adopted more widely?

Question 6

When would you use an investment method of valuation?

Answer 6

You would use it when there is an income stream to value => the rental income is capitalised to produce a ‘capital value’

EXPLAIN PRINCIPLES

Question 7

When would you use a profit method of valuation?

Answer 7

You would use it when the main value of the property is due to the trading activity of the occupier (not the building or location)

Used for pubs, petrol stations, hotels

EXPLAIN PRINCIPLES

Question 8

1) When would you use a DRC method of valuation?

2) Why is DRC method not used much?

Answer 8

1) For ancient monuments (you can’t knock it down)

2) It is based on a cost assessment and there is a never a relationship between cost and values

Question 9

What is the purpose of a residual valuation?

Answer 9

Find the value of a development site

Question 10

Different between residual valuation and development appraisal?

Answer 10

Appraisals looks at profitability of the scheme

Development appraisal is not within red book

Question 11

Hot topics in residual valuation?

Answer 11

• Build costs !!! (where are they, where they’ll go. Follow RPI as they have a direct link)
• Finance rates !!! (where are they, where they’ll go. Keep on top of lending rates)

to cope with uncertainty: put higher contingency

Question 12

When was Red Book applicable from?

Answer 12

2022

Question 13

What does the Red Book state?

Answer 13

(state understanding VPS 1-4)

It also has VPGAs, which are akin to guidance notes. For example, VPGA 10 relates to “material uncertainty” - all valuation stated that valuers really weren’t sure of things during Covid-19

Question 14

What are the different bases of value?

Answer 14

Market value =

Fair value = financial reporting under IFRS 16(??)

Question 15

What is marriage value

Answer 15

Added value of bringing two properties together

Question 16

What does Stokes v Cambridge state?

Answer 16

Stokes v Cambridge states: this land should be valued at a % of the price difference (often we take 50%)

Question 17

What is a ransom strip?

Answer 17

Piece of land that releases development potential for what otherwise would be a landlocked land

Stokes v Cambridge states: this land should be valued at a % of the price difference (often we take 50%)

Question 18

Are all your valuations exempt from the Red Book?

Answer 18

Some sections of the Red Book are of mandatory or advisory application:

Professional Statements - PS 1-2 - these are mandatory for all members providing written valuations
(PS 2 - Ethics, competency, objectivity and disclosures)

Valuation Technical and Performance Standards - VPS 1-5 - these are mandatory unless otherwise stated (see 2. below). VPS 1, 4 and 5 focus on technical standards, whilst VPS 2-3 focus on performance and delivery

Valuation Practice Guidance Applications - VPGA 1-10 - these are advisory and provide guidance on best practice. They typically relate to valuations for specific purposes or of specific asset types, e.g. financial statements, secured lending, trade related property and portfolios

Question 19

What are the exemptions to Red Book valuations?

Answer 19

There are no exemptions from compliance with PS 1-2 when providing valuation advice.

However, there are 5 specific circumstances where VPS 1-5 may be unsuitable or inappropriate to comply with:
1. Providing a valuation purely for internal purposes, without liability and without communication to a third party
2. Acting as an expert witness
3. Providing valuation advice in the course of negotiations or litigation where the valuer is acting as an advocate
4. Providing agency or brokerage advice for an acquisition or disposal
5. Performing statutory functions

Question 20

What pre-instruction checks should you carry out before a red book valuation?

Answer 20

Before accepting an instruction, you need to ensure you comply with PS 2 - Ethics, competency, objectivity and disclosures:

Check you are sufficiently competent, knowledgable and experienced to provide the required valuation advice

Ensure no conflicts of interest exist or that they are managed appropriately

Undertake the required money laundering checks on your client

Issue Red Book compliant Terms of Engagement (see VPS 1) and hold a signed copy on file

Question 21

What did you include in the valuation report?

Answer 21

VPS 3 (Valuation reports) set out what to include:

Identification and status of the valuer
Identification of the client(s) and other intended users
Identification of the asset(s)/liability(ies) being valued
Basis of value (see VPS 4)
Valuation date
Extent of investigations
Nature and source of information relied upon
Assumptions and special assumptions
Restrictions on use, distribution and publication
Confirmation of compliance with IVS
Valuation approach and reasoning
Amount of the valuation(s)
Date of the valuation report
Commentary on material uncertainty
Any limitations on liability agreed

Question 22

Run me through your adjustments for your case study valuation

Question 23

When did the Red Book get updated and what were the changes?

Answer 23

31st Jan 2022, changes reflect the international valuation standards:

• articulates clearly the near for clear ToEs when members apply,
• defines with more clarity the exemptions to VPS 1-5 under PS1 s.5 (exceptions),
• gives more detailed commentary on ESG matters in valuation,
• clarifies some of the existing Red Book terms from feedback and evolving needs

Question 24

Due diligence for a valuation?

Answer 24

Asbestos register
EPC
Planning
Rateable Value
Flood risk

Question 25

What is BCIS?

Answer 25

Building Cost information service
Managed by RICS
Cost per Sqm on GIA basis

Question 26

How do you know what finance rate you’d assume?

Answer 26

LIBOR rate + lenders profit

Question 27

Professional fee % in residual?

Answer 27

12.5% of TDC

Question 28

Contingency % in residual

Answer 28

2-10% of Construction and Professional Fees Costs, depends on risk

Question 29

How do you calculate Develoeprs profit

Answer 29

20% of TDC

Question 30

How do you present scenarios to your client on your residual valuation?

Answer 30

Sensitivity analysis

Question 31

Examples of assumptions (Red Book)?

Answer 31

Environmental Matters
“In the absence of any information to the contrary, we have assumed that:
a) the Property is not contaminated and is not adversely affected by any existing or proposed environmental law;
b) any processes which are carried out on the
property which are regulated by environmental legislation are properly licensed by the appropriate authorities;
c) in England and Wales, the Property possesses current Energy Performance Certificates (EPCs) as required under the Government’s Energy Performance of Buildings Directive – and that they have an energy efficient standard of ‘E’, or better
d) the Property is either not subject to flooding risk or, if it is, that sufficient flood defences
are in place and that appropriate building insurance could be obtained at a cost that
would not materially affect the capital value; and
e) invasive species such as Japanese Knotweed are not present on the Property”

Repair and Condition
“a) there are no abnormal ground conditions, nor archaeological remains, present which might adversely affect the current or future occupation,
development or value of the Property;
b) the Property is free from rot, infestation, structural or latent defect;
c) no currently known deleterious or hazardous materials or suspect techniques, including but not limited to Composite Panelling, ACM Cladding, High Alumina Cement (HAC), Asbestos, have been used in the construction of, or subsequent alterations or additions to, the Property; and
d) the services, and any associated controls or software, are in working order and free
from defect.”

Question 32

What % is SDLT in residual valuation?

Question 33

What % is purchasers’ costs in residual valuation?

Question 34

Definition of Market Value

Answer 34

The estimated amount for which an asset should exchange on the valuation date between willing buyer and willing seller in an arms’ length transaction after proper marketing, and where the parties had acted knowledgeably, prudently and without compulsion.

Question 35

At Elstree Gate, how did you calculate MV?

Answer 35

In approaching MV, I assumed:
- that any tenant holding a lease which expires or breaks will vacate (WAULT 4 years)
- Assumed a cap rate / yield of = 5.75%, close to that of prime offices with redevelopment potential, with 5% on the stronger tenants
- MV = £25.8m